Question

George, owner of a successful company, thinks that some employee expenses are becoming too costly for his business, especially those that are regulated by the government, like the Employment Insurance Program and the Canada Pension Plan.

He is considering changing the relationship with his sales staff. His thinking is, rather than keeping them on as employees, he will simply negotiate self-employment contracts with them. He intends to continue their current remuneration but will no longer provide any company benefits, like medical. George claims he will offer them the same full-time working structure and clientele as in the past. They will continue to report to the regional sales manager and will receive clerical support.

Based on this change, the company will no longer have the same payroll costs or the obligations under the ESA to pay for vacation, holiday time or termination pay. This now leads the way for his company to begin reducing expenses significantly.

In addition, he will no longer offer a private office to each of the salesman. By restructuring the office space, he will provide only cubicles, with desks and computers that can be shared. Only two private offices will be kept and used specifically for meetings, especially those with customers, which occur routinely due to the company’s showroom.

In reducing the square footage required by the salesman, he can merge the space with his administrative staff and downsize the current lease arrangement. It is George’s belief, given that the salesman are ‘on the road’ more than in the office, that they do not need a dedicated office and is hopeful that many will choose to work from their home more often. George argues that this opens up an opportunity for the sales staff to take advantage of deductions from their income that they would not have previously been entitled to, like work space in the home and other eligible salespeople expenses.

As a result, George is anxious to eliminate some of the paperwork that the current employment situation imposes. Salespeople have always been expected to use their own vehicles and pay for various expenses, so the company issues them a T2200 every year. With the new self-employment arrangement, sales staff will not require this form and they can now write-off several new expenses, as per the Income Tax Act.

George is a fair business man and is convinced that this is a good plan for both the company and his sales staff. He has decided to run it by you for a second opinion.

Required:

You are a professional payroll administrator advising George on why he should or should not sub-contract the sales staff.

Specifically comment on; a) the criteria used to determine contracts ‘for’ vs. contacts ‘of’ service and b) potential compliance issues with regard to statutory deductions and the ESA.

Answer 1

Me being a professional payroll administrator will advise Mr. George to consider the current model of employment rather than managing the payroll under the model of Self-employment contracts.

A business should run for the benefit of the society & specifically for the employees who works their life for the purpose of company. It is a moral obligation on the company & should be responsible for the social well-being of the company. At the end, it’s the employees who delivers value for the company.

However, from the cost management aspect, George can negotiate self-employment contracts with them.

a) the criteria used to determine contracts ‘for’ vs. contacts ‘of’ service

contracts ‘for’ vs. contacts ‘of’ service

An ‘employee’ is a person employed under a contract of service and is subject to labour laws including the minimum wages. Instead, if a person is not an employee under the labour laws, he is regarded as an independent contractor. Thus, it is important to identify the difference between a contract of service and contract for service.

A Contract of Service is an agreement whereby a person agrees to employ another as an employee and the employee agrees to serve his employer as an employee. For the purpose of the minimum wages, a collective agreement is also a contract of service.

A Contract for Service is an agreement whereby a person is engaged as an independent contractor, such as a self-employed person, vendor or freelancer carrying out an assignment or a project for his establishment. For example, a house owner engages services of a painter, a plumber or a grass-cutter for his residence.

Basically, a contract of service applies to an employee-employer relationship, while a contract for service applies in the case of an independent sub-contractor. This distinction is most important as protection of employment legislation does not apply to independent subcontractors – with the exception of the Safety Health & Welfare at Work Act 2005 and the Equality Act 2004.

When evaluating whether you hire an employee or a contractor, following factors to be considered -
1. Control: Who controls when and how the work is done? If the worker has control, it points toward a contractor relationship.
2. Ownership of Tools: Who owns the tools to get the job done? If the worker owns the tools, I mean toward your worker being a contractor.
3. Ability to Subcontract or hire assistants: Can the person you have hired subcontract the work out to someone else? Answering “yes” points towards a contractor, “no” looks more like an employee.
4. Financial Risk/Opportunity for profit: Employees generally do not take on financial risk, contractors may incur a loss or produce a profit on the work they do.
5. Responsibility for Investment and Management: Has the contractor actively invested in and/or managed their own business? Some indicators here include: having a business license, licensing their own software, hiring their own people, advertising their services, etc. For example, a true contractor will likely have invested in advertising their services to the broader public.

b) potential compliance issues with regard to statutory deductions and the ESA.

From the compliance point of view:

Statutory deductions are mainly for the benefit of the long-term perspective, retrial benefits & beneficial sustenance of the employee post his/her retirement.

From the compliance point of ESA:

“Section 5 of the Employment Standards Act (“ESA”) prohibits employers from waiving or contracting out of any of the employment standards prescribed in the ESA, except to provide a greater benefit to the employee. Any such contracting out is void.

Typically, the area of concern in an employment contract which attracts the attention of section 5 of the ESA is the termination clause (a termination clause allows employers to set a different notice period than that of common law reasonable notice).

Usually, a termination clause is unenforceable for the following 3 issues:

1. if it provides less notice than the ESA;

2. if it provides for no statutory severance on top of minimum notice; and

3. if it fails to provide the same benefits during the notice period that the employee would be entitled to had they still been working.

If the termination clause is unenforceable then the employee is entitled to common law reasonable notice of termination rather than the prescribed amount of notice as stated in the contract.

2. It lacks consideration

To be enforceable, a contract requires 3 key ingredients: offer, acceptance and consideration. Sometimes, however, employers fail to provide necessary consideration for a contract, especially where the employee has already worked for the employer and is given a new contract to sign with different terms and conditions.

Consideration means something bargained for and received by a promisor from promisee. Common types of consideration include money or labour. In other words, to form an employment contract, both the employee and the employer have to give something up. For new employment contracts, this is mostly not an issue – the employer promises to pay the employee and the employee promises to work.

However, where an existing employee already has a contract, and the employer wants to give that employee a new contract for whatever reason (often to provide a termination clause), the employer occasionally fails to provide “fresh” consideration. That is, the employer fails to provide something new, like a raise or increased benefits, in exchange for the employee agreeing to the new (and often harsher) terms and conditions of employment.

3. It contains overly broad restrictive covenants

Restrictive covenants, including non-solicitation and non-compete clauses, must be reasonable, otherwise they will be unenforceable. This means they must not be overly broad restraints on trade or future employment. Therefore, restrictive covenants should be limited in time, territory and scope. A solid restrictive covenant will limit employees to non-solicit and non-compete periods of less than one year, and to just one city, and even to a set of a specific employers.

Moreover, employers should be aware that a non-compete covenant should not be too long for another important reason. The presence of the non-compete covenant can lengthen the reasonable notice period an employer must pay an employee upon termination. Because a non-compete covenant prevents certain employment, it is inferred that a non-compete covenant will make it harder to find comparable employment and mitigate one’s damages, which is the key question the courts consider in determining the length of the reasonable notice period.

4. It is ambiguous

The courts have consistently held that employers must communicate clearly in the contract what it is intending to do. If an employer does not use unequivocal, clear language and instead drafts an ambiguous clause in the contract, the courts may find that clause to be unenforceable or interpret any ambiguities strictly against the employer’s interests.

An example of an ambiguity in an employment contract is a termination clause which fails to explicitly state the employer is entitled to “minimum” notice “only”. Courts have consistently found that a termination clause was ambiguous because it did not explicitly oust the right to common law reasonable notice. Rather it just stated that the employee was owed “applicable” employment standards notice, without stating the employee was owed applicable employment standards notice “only” or something to that effect.

5. It contains a fixed term

Employers should almost never use fixed term contracts. They could be on the hook for months or even years of having to pay wages to an employee without her having to work or even look for work (i.e. attempt to “mitigate” her damages). This is because if the employment contract contains a fixed term, and the employee is terminated before the end of the fixed term, the employee is entitled to the balance of the fixed term contract, unless the contract had an enforceable termination clause limiting such a windfall.